An expensive ten year solution to a 1 year problem? POWER POINTS: Winners & Losers In Western Pwr Mkt Crash
By MARK GOLDEN
A Dow Jones Newswires Column
NEW YORK -- As far as commodity market moves go, the collapse of western electricity forward prices must rank as one of the biggest.
In the past two months, the value of western power for July through December fell from $450 a megawatt-hour - using a basket of the four major hubs - to $125/MWh today. Let's say 15% of western U.S. generating capacity is in the market, with the other 85% generated and retained by utilities. The loss in market value for on-peak energy for the second half of this year is some $17 billion.
Add in the lost value for off-peak power in the second half of this year and for all hours in 2002, and you get to $25 billion pretty easily. And, despite an upward bounce Friday, the sentiment in the market is that the downward trend has a little farther to go.
The stock market likely will soon punish all the companies that made so much money during the upswing and saw their stocks trade as if the California crisis would last several years. In time, Wall Street may distinguish among those that sold a lot of forward capacity at or near the top of the market and those that missed out. Those that sold not only locked in great prices, but will likely be selling higher volumes for years to come due to the commitments.
The California Department of Water Resources went on a $54 billion forward contract-signing spree when the market was at its zenith. Calpine Corp. (CPN) moved quickly and came away with the lion's share of those contracts at $13 billion.
Williams Co's. (WMB) sold a 10-year supply to DWR for up to 1,400 MW. The company didn't release the total dollar figure, but a decent guess would approach $5 billion.
Dynegy Inc. (DYN) and partner NRG Energy (NRG) entered into a four-year 2,300-MW deal with California. Like Williams, Dynegy didn't say what the contract was worth, but figure about $3 billion. According to one source, Dynegy sold the state a tolling deal, in which case the value of its contracts could turn out to be somewhat less.
Constellation Energy (CEG), which doesn't own a major power plant in California, nevertheless saw a good trading opportunity and sold $3.6 billion in power. Aquila (ILA) sold into the peak, according to market sources, and so did the energy trading divisions of Merrill Lynch (MER), Morgan Stanley (MWD), ScottishPower's (SPI) PacifiCorp and BP Amoco (BP).
Sempra Energy (SRE) sold a lot - $7 billion - but not until early May. It would have gotten a better price if it had moved a month or two earlier.
Mirant (MIR) did too little, too late: 500 MW for a year and a half done in late May. For this, they issued a press release? But market sources said Mirant earlier sold a fair amount of forward power to other parties besides DWR.
Left on the platform after the Gravy Days train pulled out of the station: Duke Energy (DUK) and Reliant (REI). Duke is holding a $4 billion "memorandum of understanding" that can't be worth even $3.5 billion now. Details of Reliant's unsigned MOUs haven't been released.
But it's one thing for a seller to leave a lot of money on the table, and it's another for a buyer to have bought at the peak. DWR wasn't the only one. Almost all regulated utilities in the West are long at some very rich prices. On the majority of days this summer that aren't particularly hot, the utilities could be selling their excess $350 power to DWR for $75. In the fall and winter, western utilities such as Sierra Pacific Resources (SRP) and Pinnacle West's (PNW) Arizona Public Service Co. may have to go to their state utility commissions to get hundreds of millions of dollars in losses included in customer rates. Could be tough.
Enron Corp. (ENE) is a special case. Their traders started shorting western energy at the top, market sources agreed. But those same traders had to continue to make a market on EnronOnline, presenting both offers to sell and dreaded bids to buy, as a matter of corporate policy. When a market makes violent moves, as western power did in particular the past two weeks, market makers can take a beating. And that, according to traders at other companies, is what happened to EnronOnline.
DWR is already taking heat for its "white elephant" contracts in the local papers. Its deals could be overvalued by up to $10 billion in today's market. To be fair, the state's move out of the spot market and into the forward market is a big reason why prices have fallen. California - first the utilities and then the state itself - was the victim of an unbelievable short squeeze, and it had to pay dearly to get out of it.
But the state could have been much smarter about the move, considering how much money was at stake. Customer rates were finally increased 40% at the end of March. The forward market correctly figured the rate increase would slash electricity demand and wholesale prices. Within two weeks, the market ended its 17-month-long bull run.
Many industry experts said early this year that California should raise rates first and then sign long-term contracts. That would have been common sense. Instead, the state signed two-thirds of its deals while Gov. Gray Davis was promising not to raise rates.
Also, prices for this summer and beyond plummeted when the state got the spot market under control in June. So why did it sign so many deals for five years to 20 years? Just getting contracts for this spring and summer would largely have done the trick. Again, there was no shortage of experts advising against "a 10-year solution for a one-year problem," as one put it.
Davis justified the long terms by saying the state would pay way below the spot market for the first few years of the deals in exchange for paying a little above market for the outer years.
In fact, using current forward prices, spot electricity looks to go for around $90/MWh in the fall, while the state will be paying a fixed $142/MWh for a huge supply. California consumers weren't supposed to enter into the above-market period until around 2003, not this October. |
